Executive Summary: Capital and funding constraints have resulted in bankers now being asked by management to justify why the bank should continue to invest in their businesses. Bankers now need to demonstrate that their business is relevant to their bank, as it refocuses its strategic emphasis. Proving relevance demands going beyond citing past performance to show future “fit” and value.

 

We are seeing it more and more. Business heads at banks are being asked, either explicitly or implicitly, to demonstrate that their business is important and “relevant” to the core focus and future success of the bank. No business is exempt from top management’s interest in knowing that it fits into the bank long term. Many basic assumptions that have guided investment decisions for many years within banks are now being challenged. Size and growth are losing out to quality, stability, and fit with the corporate mission.

 

The current funding and capital situation dictates that banks be more selective in where they put their investment dollars. While it has been true forever that banks should not try to be all things to all people, an imperative now exists for them not to do so. Sufficient dollars simply are not there. In addition, top management time is more in demand than ever before, requiring increased focus.

 

What is Relevance?
Understandably, until recently most bankers thought that making money for their company and showing annual asset or revenue growth proved that they were relevant. No more. Today, for a bank business to be relevant and an ongoing part of the organization, its activities need to fit into and help define the bank’s long-term strategy. Ideally, the business should be critically important to the bank’s identity and provide clear value to its customers.

 

Each bank needs to determine the key characteristics that define relevance in their bank. Differences will exist based upon customer type, portfolio mix, and risk appetite. For many of the banks we know, relevance means:

 

• Relationships with clients, not one-off transactions

 

• The opportunity for and expectation of cross-sell

 

• The ability to generate deposits and fee income

 

• High returns not just high revenues

 

• Strong credit quality

 

• Ability to differentiate

 

• In-footprint focus

 

In effect banks are creating screening criteria against which they can evaluate their businesses and assess their relevance weight.
 
Factors Driving Relevance
Some of the areas receiving the closest evaluation for relevance are the normal suspects, but others are not. Areas being impacted include:

 

* The branch. Many banks have abandoned or delayed aggressive branch expansion plans in light of poor de novo performance and an unclear picture for future branch profitability. Branch-based transactions are down for the industry. As online, ATMs, and mobile continue to take share, branch activity will decline. We think justifying new branch openings is harder than it has ever been. And, while branches will remain highly relevant for most banks, their central role as a deposit generator and customer service hub is eroding. We expect many banks to have fewer, not more, branches a year from now. Further, the branches of the future will look very different (smaller and with fewer personnel) than they do today.

 

* Small business. Small business banking’s relevance should be easy to show, but at many banks, execution in this area has been erratic and ineffective. Small business portfolios should fund themselves two-three times in excess of loan needs, and this area allows for extensive personal and business cross-sell, including to the owner for investment services. Nonetheless, we have seen several cases in which an efficiency-focused bank has collapsed this area into commercial banking, probably undercutting those banks’ small business efforts for years to come. The lesson here is that rather than cut your focus on a business that appears to provide a natural fit, make sure that you have made the commitment for long-term success.

 

* Commercial lending. The commercial RM used to be the top dog at many banks. Those days are gone, unless the bankers can deliver on deposits and fees. RMs need to “share” their clients with cash management, trust, personal banking, and other specialists if they are to generate the type of business most “relevant” to banks going forward. RMs will either prove their relevance or be replaced.

 

* Mortgage lending. Twenty years ago, mortgages were the ultimate relationship product. That ended with the advent of the securitization market. While it provides more information about a consumer than any other product, few banks seem able to leverage that information, selling more on rate not relationship. This may be a necessary product, but, unless it can be managed more effectively, it does not serve as a relationship base.

 

* Credit cards. The generic credit card generates assets not deposits (not a good thing today) and usually is viewed as a commodity. To justify a continuing investment, the product needs to be distinguished by a rewards program and other features that resonate with the customer; doable but hard to do. Outsourcing of this capability will continue to grow.

 

* Specialty finance. Many finance businesses prided themselves on building businesses that were independent of their slow moving bank owner. Now, they need to align themselves more to support bank clients. In addition, they must incorporate a meaningful focus on deposits, requiring deposit relationships as part of their sales process. These remain attractive businesses that can contribute strong margins; their approach for doing so, however, will change.
 
Concluding Thoughts
Until recently, growth was the mantra at banks. It really did not matter if that growth occurred opportunistically or strategically. Now, with slower growth dictated for many, the rules have changed. However, virtually any business can become more relevant and more critical to its bank’s long-term success by narrowing its focus to higher-priority customers and ensuring that its sales effort widens to capture more of the deposits and fee-based wallet.